Man vs. Machine: Glossary Of Terms

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Monday, 13 Sep 2010 | 4:42 PM ETCNBC.com

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The Flash Crash of May 2010 has focused much attention on the extraordinary role of computer trading in the modern stock market system, as well as the players and trading methods involved. High-frequency trading is probably the best known, but a number of lesser-known components, such as dark pools and Reg-NMS, have also emerged.

Here's a glossary of keywords and their definitions to help navigate the high tech, high speed world of stock trading.

Algorithmic Trading: Computerized trading that buys stock at the exact time when it would cause the least amount of impact on the stock price.

Alternative Trading Systems: Venues for trading stocks or securities off of exchanges or when exchanges are closed. Some of the major ones include electronic communication networks, ECNs, dark pools and matching networks.

Arbitrage: Buying an asset and then selling it again immediately in a different market for a profit.

Bid-Ask Spread: The difference in price between the what a buyer has offered to pay for an asset and the the price at which a seller is willing to sell.

Broker: An individual or institution that initiates trades for a client for a commission.

Crossing Networks: A kind of alternative trading system exchange that allows buyers and sellers to trade directly with each other, before connecting with a exchange or other system that publicly displays the transaction.

Dark Pool: Large stock trades that are largely hidden from the public because the price and/or name are not displayed during the transaction.

Derivatives: A financial instrument or product, whose value is derived from another asset and and linked to expected future price movements. Futures and options are two common types of derivatives.

Electronic Communication Networks: A real time computerized trading network between brokers and traders that leaves out the middleman.

Exchange-Traded Funds (ETFs):An investment fund that trades like an individual stock but tracks a group of securities, an index or commodities.

Flash Crash: Named used to describe the events of May 6, 2010 when the US stock market went into a sudden nosedive, wherein the Dow Jones Industrial Average fell some 600 points, only to recover several minutes later.

Hedge Fund: An aggressively managed investment fund limited to a certain amount of investors, usually of a high net worth, that charges high fees.

High-Frequency Trading: A fast type of algorithmic trading using a supercomputer that can make trades in less than a second. The strategy is meant to capitalize on small differences in the bid-ask spread though a high volume of shares.

Market Maker: A middleman that quotes stock prices to both buyers and sellers and tries to keep the market liquid, or flowing.

Mutual Fund: A collection of stocks or bonds managed by an investment professional who buys or sells the securities in the fund to reach a return goal. Investors are charged a fee.

Option:A financial contract with the opportunity, but not obligation, to buy or sell a stock at a certain price point and during a certain time frame.

Quote Stuffing: When a large number of orders to buy or sell a stock are placed and canceled immediately afterwards.

Regulation-NMS (Reg-NMS): A set of rules approved by the Securities and Exchange Commission, one of which requires that investors get the best price available for an asset on any given trading venue when an order is executed.

Smart-Order Routing Systems: A program that allows traders and investors to search for opportunities in dark pools and execute orders without having a larger impact on the financial markets.